| Peter Klein |
I started writing a really clever post about the famous Diamond paper (with Philip Dybvig) on financial intermediation and bank runs, its relevance for the financial crisis, and its elevated status in light of Monday’s Nobel announcement. Then I remembered that the author is Douglas Diamond, not Peter Diamond. Doh!
So I’ll try a different framing. “Speaking of guys named Diamond. . . .” The Diamond-Dybvig model, presented in a 1983 JPE article, has become famous enough to spawn an extensive secondary literature (and even sports its own Wikipedia entry). In a nutshell, it models fractional-reserve banks as intermediaries transforming illiquid assets into liquid liabilities and depicts the relationship among depositors as a coordination game with two Nash equilibria, one in which nobody tries to withdraw his funds because he believes no one else will try to withdraw his funds, and one in…
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Utopia, you are standing in it! 
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